Just a few days after forex traders were convinced to ramp up their BOE rate hike expectations for this year, Governor Carney starts giving mixed signals during this week’s inflation report hearings. What’s up with that?
U.K. MP (Member of Parliament) Pat McFadden couldn’t have put it better. “We’ve had a signal that rates probably wouldn’t rise until 2016, we then had a market expectation that rates would go up in 2015, we then got a speech saying that might be an underestimation,” he explained. “It strikes me the Bank is behaving a bit like an unreliable boyfriend. One day hot, one day cold, and the people on the other side of the message are left not knowing where they stand.” (Cue Hot N’ Cold by Katy Perry)
Pound bulls didn’t seem too happy about getting mixed signals from the BOE either, as GBP/USD tumbled back below the 1.7000 major psychological level after Carney said that there’s scope to absorb more economic slack before interest rates are raised. GBP/JPY dipped to a low of 172.94 while EUR/GBP climbed back above the .8000 mark. Could this be a chance to reestablish long pound positions though?
Although Carney has taken the hot seat in yesterday’s inflation report hearings, one can’t really blame the guy for jumping from one stance to another. After all, he has repeatedly clarified that monetary policy changes will be dependent on economic data, and the U.K. has had its fair share of ups and downs. On the one hand, production and spending have picked up based on the latest PMI readings and retail sales data. On the other hand, wage growth remains subdued and reflects downside risks to inflation. Cut him some slack!
Carney also emphasized that the BOE is moving closer to normalizing interest rates but he can’t specify an exact date on when tightening might start. He also pointed out that markets should focus less on the timing of rate hikes and should instead look at the scope and pace of policy tightening. “We’d like to see the market adjust to the data. Just as our opinions are updating, markets should adjust to the data,” he noted. “A short-term market for expectations of bank rates that move around with the data is a healthy thing.”
While the latest BOE event hasn’t been as hawkish as many had hoped, this probably doesn’t change the fact that the U.K. economy is making good progress and that the BOE is considering hiking interest rates sooner or later. Do you agree?